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Myanmar, The Last Frontier?

Many people believe that Myanmar presents a great opportunity for investment and growth. Rich in natural resources and with a youthful population of 60 million, the country seems ripe for investment. However the challenges facing the country are substantial.

An antiquated financial system, poor infrastructure, an unskilled labor force, lack of hard data and a government bureaucracy that is ranked bottom by Transparency International are detrimental.

However, the perceived opportunities available have many potential investors prepared to overlook and even combat the negatives.

Stuart Dean, chief executive of General Electric’s operations in ASEAN, told the Financial Times that his company is balancing observation of U.S. and local rules with its “early mover advantage” in Myanmar.

“So much of our strategy is geared towards emerging markets – people ask about the risk of going in, but we feel the risk of missing the opportunity is greater…Myanmar will not be an easy place to do business initially but we see it as a long-term opportunity.”

During a televised speech in June, Myanmar President Thein Sein announced some very ambitious plans, to triple the size of Myanmar’s economy in five years. To achieve this, the country will need to grow output by more than 25% year on year; something that Myanmar economy expert, Professor Sean Turnell of Macquarie University in Australia told the Wall Street Journal was “ambitious to the point of utterly unachievable”.

Those ambitious economic growth plans coupled with the removal of sanctions, are encouraging numerous trade delegations; from the UK, the United States, Thailand, India, Hong Kong and many others to travel to the country to meet with ministers and to learn more about what the country has to offer.

Although investment activity into the nation remains in an exploratory state with most investors moving very cautiously as Myanmar’s business environment is still considered to be opaque. The finalization of the Foreign Investor Law at the beginning of November will help to encourage those potential investors.

It’s not only the vast natural resources that Myanmar has, nor the potential for investment in infrastructure, apparel and hardline manufacturing, that is attracting attention. As the nation begins its path to prosperity, consumer demand is poised to follow. With a population of 60 million, multinational companies are keen to secure a share of this emerging market. Fast moving consumer goods (FMCG) brands such as Pepsi, Coca-Cola and Kraft Foods see opportunities here as do electronics firms including Mitsubishi and Digicel; all hoping that Myanmar will follow the rapid growth trajectory that other emerging Asian nations have enjoyed.

At present consumer spending is negligible, while government spending accounts for 26 percent of GDP (compared with the U.S. where consumer spending accounts for 70 percent of GDP and wherein China consumer spending has grown to 37 percent of GDP).

There are only an estimated 1 million cell phones in Myanmar. Developed countries generally have more cell phones than people, and countries like China, India and the Philippines are rapidly following suit with 75%, 77% and 92% of the population respectively having cell phones. Myanmar’s fixed telephone lines and broadband internet also lags behind countries such as Vietnam and the Philippines.

Economists estimate that by 2030 Asia’s consumption will have reached US$32 trillion, accounting for 43% of global consumption. If Myanmar achieves its expansion rate of 7% to 8% each year it will become a middle income nation and will have tripled per capita income within the same time frame. The country’s attraction as a future market for consumer product brands will continue to grow.

Any organization contemplating entering the market will need to carefully weigh up the possible long term benefits against the immediate difficulties facing the country.

DATA Accurate data is difficult to obtain and to substantiate. Everything from manufacturing, exports and GDP figures can’t be verified. Official export figures were estimated at US$8.5 billion in 2010, but this doesn’t take into account the amount of smuggled merchandise crossing the borders into Thailand, China and Bangladesh.

Despite the Myanmar government tightening controls, in 2009, one British NGO, Global Witness claims that it discovered a haul of imported logs and sawn timber in China’s Yunan province. Of the 270,000 cubic metres of logs and 170,000 cubic metres of sawn timber an estimated 90%, were felled illegally.

GDP data varies, Myanmar has reported impressive GDP growth averaging above 10% from 1992-2010. The International Monetary Fund (IMF) estimated GDP growth to be considerably lower, averaging 4.6% for the same period instead.

FINANCIAL The banking sector is under-developed and under-capitalized. Local bank financing is virtually non-existent. There is really only one bank, Myanmar Investment and Commercial Bank (MICB) providing any type of facilities.

MICB was established in 1989 and is 100% state owned. The bank’s head office is in Yangon and has one branch in Mandalay, upper Myanmar. It currently employs 337 people.

Cash transactions are the norm, with credit cards and ATMs not used or available.

Things are changing. The currency was moved to a managed float in April. The rate set was 818 kyat against the US Dollar, a considerable difference to the previous official rate of 6.4 kyat. The Asian Development Bank (ADB) and the World Bank recently opened offices in Myanmar. The World Bank announced at the beginning of November a grant of US$80m in aid and will start lending to the country again, with a further US$165m earmarked once the country clears its previous debt.

“I am heartened by the reforms that have been taking place in Myanmar [Burma] and encourage the government to continue to push forward with their efforts,” said World Bank President Jim Yong Kim in a statement.

The credit card company, Visa Inc. also announced plans to train local banks to use electronic-payment systems making ATMs and credit card transactions possible in months rather than years.

INFRASTRUCTURE The poor condition of Myanmar’s infrastructure is a well-publicized obstacle to the country’s development. The country ranks 129th out of 155 countries in terms of Logistics Performance.

The area around Yangon where most factories are located is accessed by two-lane roads that congest at bridges and intersections. With manufacturing at its current reduced level, progress via road from industrial areas to the port terminals is slow but steady. However, the capacity of the current road system is very limited, and increases of traffic will put a serious strain on the existing network.

Yangon has four port terminals, three private and one government-owned. These terminals are located on the south and south-west side of downtown Yangon and are accessed via two-lane roads shared with other city traffic. Currently there is no facility for freight consolidation in operation by major forwarders. Until DAMCO opens a planned consolidation facility in 2013, goods must be shipped in full container-load from factories.

Several large Thai companies had been promoting investment in a US$50 billion port and industrial project 600km to the south of Yangon in the town of Dawei. The project had several setbacks, with a planned coal power plant dropped and a major Myanmar backer announcing his intention to pull out of the project. However a “special committee has recently been formed between Thailand and Myanmar to speed up development of the special economic zone” advised Jeremy Winterson, head of Connor’s Thailand office. The port, which will be part of the zone, when completed will allow western bound shipments to bypass the Strait of Malacca.

Yangon Airport completed an international terminal in 2007 that is serviced by direct flights from Thailand, Singapore, Malaysia, Vietnam, and regional cities in China. In June 2012, Myanmar restarted a visa-on-arrival service for business travelers.

Another key challenge is a lack of adequate electrical power. Factories often must supplement supply using expensive diesel generators. Residential and commercial districts face the same limitations, with power cuts at irregular intervals throughout the day.

LABOR FORCE The country has a labor force of 31.68 million, out of a population of 60 million. Unfortunately it’s unskilled with 70% employed in agriculture. Only 7% work in industry.

While a low wage structure may attract manufacturers, the lack of skilled workers will limit scope to basic products.

The country’s human capital is a key component to future growth. 25% of the population is below working age, and only 7.7% over the age of 65, this compares to China with 20% and 11.5% respectively. However “the country is the only developing Asian country with a defense budget greater than the education and health budgets combined.” [Asian Development Bank report] The government spends less that 2.0% of GDP on education and health.

TRADE Myanmaris in a unique position geographically. It borders China, Bangladesh, Thailand, India and Laos. Strengthening regional trade and investment ties within ASEAN with the establishment of an Asean Economic Community (AEC) free trade zone in 2015 and increases in trade with China and India can only further benefit the country.

The advancements that Myanmar has taken politically and economically have been recognized and rewarded with it being offered the chairmanship of ASEAN in 2014.

Political ties continue to strengthen with a visit by the president of the United States, Barrack Obama announced this week.

WHAT THE FUTURE HOLDSMyanmar is in a strong position with great natural resources, a large youthful population, great geographical location and a government that seems determined to embrace economic and political change.

However, even if Myanmar manages to stay on its current path of economic and political change, the obstacles and challenges it faces, will take a considerable amount of investment, time and effort to overcome.

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This is a fair and balanced report on the country and its chances and opportunities. However, we do not see that Myanmar is in a strong competition with the neighboring countries of ASEAN and each and everybody is fighting for FDI´s. We believe that Myanmar needs a kind of “Marshall Plan” as it will take decades otherwise to get anywhere near the standards of Malaysia, Thailand and the like